Prophet of Innovation: Joseph Schumpeter and Creative Destruction
by Thomas K. McCraw.
Belknap Press (Cambridge, Mass.)
736 pp., $35 cloth, 2007
By the middle of the eighteenth century, writes Joseph Alois Schumpeter in his History of Economic Analysis, “the time of the polyhistors,” —that is, universal scientists—“was definitely over.” One might add: “With the possible exception of Joseph Schumpeter.” Blessed with titanic erudition, Schumpeter made permanent contributions in multiple fields of inquiry. He also, as revealed in Mark McCraw’s recent biography, Joseph Schumpeter: Prophet of Innovation, had an uncommonly fine character.
At the time of its publication, Schumpeter regarded his 1939 treatise, Business Cycles, as his magnum opus. An experiment in what he called “exact economics,” Business Cycles attempts in the course of over 1000 pages to fit all economic history into definite statistical patterns. The effort, as Schumpeter’s student Paul Samuelson put it, eventually “began to smack of Pythagorean moonshine.” McCraw is one of only a handful who have ever actually read Business Cycles; to Schumpeter’s chagrin, even his own students ended up neglecting it. The spectacular contemporaneous success of John Maynard Keynes’s General Theory made the failure of Business Cycles all the more poignant. In his last decade, Schumpeter labored in the omnipresent shadow of Keynes.
The disappointment of Business Cycles daunted Schumpeter just long enough to enable him to write what he jocularly called his “potboiler,” Capitalism, Socialism and Democracy. At close to 400 pages, this slender volume (by Schumpeterian standards) is perhaps the most stimulating economics book of the past century. In it, Schumpeter scales the Olympian heights four times over. Part I may be the most penetrating commentary in all the literature on Marx. Part II is simply the most important account of the capitalist economy ever penned. Part III, today the least relevant, is merely the most enlightening meditation available on the controversy that nearly destroyed civilization in the 20th century, namely, the relative merits of capitalism and socialism. Part IV introduces a theory of modern democracy that upends every bromide ever uttered on the subject, from the most reverent piety to the most reactionary expression of disdain.
Each one of these performances would suffice to elevate Capitalism, Socialism and Democracy to the status of a classic. That all four appear in the same volume is nothing less than an intellectual miracle. Together they make Capitalism, Socialism and Democracy one of the greatest works of social science in our time.
Fittingly for such a masterpiece, Capitalism, Socialism and Democracy gives no comfort to the partisans of any creed. In the end it seems fair to describe Schumpeter as a conservative defender of a mixed feudal and bourgeois European civilization. Yet to call Schumpeter a “conservative” is about the least interesting thing one can say about him. He writes with an almost inscrutable irony, made possible by his absolute mastery of all sides’ arguments. To take one example, Schumpeter rejects the two most common arguments against socialism: the vulgar argument that men are too selfish to make socialism work, and Ludwig von Mises’s argument (handed down like divine revelation to each new generation of free-marketeers) that economic calculation under socialism is impossible. Schumpeter instead grants that socialism may be more efficient that capitalism. After he finishes explaining why, however, the reader cannot help but recoil from what the socialist system demands. Socialism, argues Schumpeter, can tame men of super-normal ability and ambition only by holding out to them promises of quasi-feudal honors. (“Why not?” Schumpeter asks, “Trotsky himself accepted the Order of the Red Flag.”) It can discipline subnormal performers with graver and more credible threats than any found in commercial society. (While capitalists can only take away a worker’s current job, for example, the socialist manager can take away his entire means of sustenance.) Though Schumpeter never needs to say as much, great men under socialism necessarily dominate the weak. In a final masterstroke, Schumpeter goes on to prove such a system is fully compatible with what goes today by the name of democracy.
In contrast to socialism, the capitalist system channels the energies of ambitious men towards relatively benign ends, while incidentally relieving the grossest suffering of the masses. Capitalism is not always pretty or admirable. Schumpeter coined the paradox “creative destruction” precisely to emphasize how cruel, almost inhuman the capitalist engine is, even as it generates such extraordinary wealth. “It does not follow,” Schumpeter writes,” that men are ‘happier’ or ‘better off’ in the industrial society of today than they were in a medieval manor or village. . . . One may accept every word I have written and yet hate [capitalism]—its utilitarianism and the wholesale destruction of Meanings—from the bottom of one’s heart.” Like all conservatives, Schumpeter could offer only a tragic vision: evil and good are always intermixed, not as unfortunate happenstance but of necessity.
Capitalism, Socialism and Democracy is only Schumpeter’s most well-known work. As a monument to one man’s erudition, McCraw compares Schumpeter’s History of Economic Analysis to Samuel Johnson’s Dictionary of the English Language. As with Johnson’s Dictionary, it took an almost superhuman labor and manifests on every page the author’s indomitable personality. Unlike Johnson’s Dictionary, History of Economic Analysis is not a complete work. Assembled in final form by his widow, the book reads like what it is, namely, a mammoth heap of notes towards a great work. With its memorable portraits and keen (though relentlessly idiosyncratic) judgments, an edited, abridged version of History of Economic Analysis might read like a social science version of Johnson’s Lives of the Poets. The complete volume makes one grateful that Schumpeter left behind some relatively more modest efforts.
Despite his prodigious output, Schumpeter, like Johnson, was as famous in his own day for his conviviality as for his asceticism. He routinely dazzled audiences with his learning and insight. The nimblest wit in any company, he composed mordant aphorisms that deserve to be compiled in a volume. (“That rara avis—an honest idealist.” “There are two values in life: the first is victory and the second is vengeance.”) Schumpeter was also a tireless mentor and loyal friend. The many eulogies he received at his death—several from Nobel-prize winning eminences—were apparently very much heartfelt.
Since Schumpeter’s death, the rumor has unhappily persisted that he was insufficiently anti-Nazi. In fact, as McCraw shows, Schumpeter despised the Nazis and his adoptive European family died resisting them. Uninfected by anti-semitism, he also waged a tireless letter-writing campaign in the 1930s to rescue Germany’s Jewish economists. As his fellow Austrian and friend Gottfried Haberler noted, Schumpeter knew that “that if he had remained in Germany [in Bonn, where Schumpeter taught before leaving for Harvard] he would have been one of the first candidates for the concentration camp.”
Nevertheless, Schumpeter’s reputation fell under a cloud during the second world war. What actually happened, as McCraw proves, is this: In 1937, Schumpeter married Elizabeth Boody, in her day one of the America’s top scholars of Japan. (Schumpeter himself had lectured in Japan and remains to this a day a celebrated figure in that country.) While Elizabeth expressed no sympathy for Japanese atrocities in China, she decried Roosevelt’s hostile policies and argued that they were marginalizing Japanese moderates and likely to provoke a Pacific war. (Privately, Elizabeth noted with dismay the influence of communists and fellow-travelers within Roosevelt’s administration.) When war finally came, the U.S. government’s racist propaganda and the Allies’ policy of slaughtering civilians in Dresden and Tokyo appalled the Schumpeters. The Schumpeters also perceived that the Allies’ policy of unconditional surrender would lead to Soviet domination of Europe and Asia. For these unpopular, though accurate, views, the Schumpeters not only lost friends but came under FBI scrutiny, which at the behest of J. Edgar Hoover collected a risibly inaccurate dossier on them. The whispering campaign against them has continued to this day.
Convinced that a man is lucky to die at the height of his powers, Schumpeter faced death with unusual dignity. In late 1949, his lecture to the American Economic Association received what McCraw calls “a thunderous and prolonged standing ovation.” That night in his diary, Schumpeter thanked God and asked for help to become accustomed to death. “Bless 1949 if you want to. Not much more than a year can I expect.” Fifty-three weeks later, he translated a few lines of Euripides, retired to bed, and died in his sleep.
Schumpeter’s influence has grown ever since, even as economics seems to have permanently eschewed his magisterial, inter-disciplinary approach. Introductory economics classes conventionally begin with a proof that the model of perfect competition is “Pareto efficient” and end by comparing the model to the inefficiencies of monopoly and monopolistic competition. As elegantly as these exercises demonstrate the uses of mathematics in economics, they teach students almost nothing about how the capitalist economy actually works. It is precisely the inefficiencies of capitalism, which hold out the promise of prodigious rewards to innovative and spirited men, that make it so productive. One can suffer through whole degree programs in economics without ever encountering the entrepreneur, the sociological type that Schumpeter developed and without which the capitalist engine remains utterly inexplicable. Ironically, Schumpeter, who founded a journal of mathematical economics and co-authored a textbook of mathematics for economists, did more than anyone to encourage the use of mathematics in economics. Yet he never intended for mathematics to displace all other tools of analysis. His own works contribute as much to history, sociology, and political theory as to economics and have spawned whole research programs in each of those fields. Despite economists’ comparative neglect of Schumpeter, the number of academic citations to his work, as McCraw notes, has recently surpassed those to Keynes.
For observers of contemporary politics, Schumpeter presents something of a puzzle. There can be no doubt that he was the twentieth century’s most formidable conservative mind. (According to McCraw, Schumpeter in his last years was planning to write a book on conservatism.) At the same time, the American “conservative movement,” though respectful of Schumpeter as respectful it must be, has not canonized his writings. Movement conservative intellectuals are instead defined by their familiarity with a handful of comparatively minor writers. Only the most churlish would denigrate these writers’ achievements or compare them to Schumpeter’s. The canonical conservative movement authors developed eccentric, sometimes cabbalistic methods of revealing truth well suited to attracting followers. Schumpeter, by contrast, wrote in a style calculated to repulse ideologues of all kinds. His works could not fit comfortably into the canon of any movement, not even one that calls itself “conservative.” Nevertheless, a conservative can no more overlook Schumpeter than a mountaineer can overlook Everest. Movement conservatives need not jettison their canon. To justly bear the name “conservative,” however, they must also know Joseph Schumpeter.
Austin Bramwell is a lawyer in New York.